Draft Registration of Overseas Entities Bill Contents

Conclusions and recommendations

1.We support the Government’s ambition to improve the transparency of overseas beneficial ownership in the United Kingdom property market. Overall, we feel that this draft legislation is timely, worthwhile, and, in large part, well drafted. (Paragraph 11)

2.We have approached this draft Bill on the clear understanding that while the Register is an important piece of the anti-money laundering jigsaw, it is only one piece. The Government should not lose sight of how this proposal fits with other anti-money laundering measures in its commendable efforts to design as effective a Register as possible. (Paragraph 35)

3.Entities which do not fit the description set out in the Bill will not be bound by its requirements. The definition of overseas entities must therefore be clear and authoritative, and sufficiently wide and flexible to encompass the broad range of overseas entities which own UK property. (Paragraph 39)

4.It is unlikely that the definition of “legal entity” would be interpreted as including individuals. But we have heard concern that the draft Bill’s unqualified reference to a “legal person” in Clause 2 may add unnecessary difficulty to those questioning whether they come under the scope of the Bill. (Paragraph 42)

5.The description of the term “legal entity” in Clause 2 of the draft Bill and its Explanatory Notes should therefore put the definition of such a pivotal term beyond any possible doubt. (Paragraph 43)

6.The land registries are not equipped to make final decisions on the legal personality of an entity. It is inappropriate to delegate this task to them, not least because such a decision could, under the draft Bill, lead to criminal prosecution if the entity had not registered correctly. (Paragraph 54)

7.We consider that such a requirement would put significant burdens on the land registries. There may be new forms of structures which emerge in other jurisdictions whose status as legal persons the registries, the entities themselves, and lawyers will find difficult to determine. (Paragraph 55)

8.Decisions of such consequence are much better suited to Companies House. Furthermore, the Government should publish guidance on how the definition of overseas entities should be interpreted. (Paragraph 56)

9.We agree that the Government should make efforts to avoid registering individuals out of scope of the Bill. We therefore recommend a pre-clearance mechanism, including some formal means of adjudication, which confirms in advance of transactions whether legal entities are registrable. Disputes about categorisation will be inevitable, and the Government will need to consider necessary mechanisms to account for entities which disagree with decisions under the Act. (Paragraph 57)

10.We are persuaded of the need for entities to be able to register their beneficial ownership information as quickly as possible, particularly in the case of special purpose vehicles and property holding companies which are sometimes incorporated only a few days before a transaction. We urge the Government to provide Companies House with sufficient resources to meet this challenge. (Paragraph 59)

11.Regulations made under Clause 30(6) would exempt entities described in secondary legislation not only from the requirement to publicise beneficial ownership information, but also from providing that information to Companies House. The Government should consider the merits of a new clause to protect information registered by certain types of entities—such as foreign governments—from public disclosure, while still requiring the provision of that information. (Paragraph 67)

12.We understand that new overseas entities may appear, and that the powers outlined by the Bill will need to be flexible enough to accommodate such developments. Yet Clause 30(6) allows the Secretary of State much discretion, and the types of overseas entities which might be exempted under this power are fundamental to the scope of the Bill. (Paragraph 68)

13.Our clear preference would be for categories of those types of entities which may be eligible for exemptions under Clause 30(6) to be on the face of the Bill. (Paragraph 69)

14.Although we do not believe that it is the Government’s intention to exempt, wholesale, entities from certain countries, the potential effects of Clause 30(6) call for adequate Parliamentary scrutiny. We therefore recommend the use of the affirmative resolution procedure for this significant power. (Paragraph 70)

15.The Government proposes that powers under Clause 15 to modify application requirements should be exercised only when registers are truly “equivalent” to the Register proposed by the draft Bill. (Paragraph 74)

16.We are concerned that the meaning of “equivalent” under Clause 15 should be closely defined. For true equivalence, we believe that overseas registers should be publicly accessible. Companies House should ensure that it signposts these registers so that users can find them without difficulty, providing a link to, or contact details for, the relevant register. (Paragraph 75)

17.We heard evidence that trusts might be used to circumvent the obligation to register contained within the draft Bill. This possible loophole is worrying, and, to allay these concerns, the Government should set out in detail in its response to this report how it intends to counteract this possibility. (Paragraph 87)

18.The Government told us that the UK’s implementation of the Fifth Anti-Money Laundering Directive would aim to close such loopholes. It is of critical importance that it does so, and as soon as possible. We are therefore grateful for the Minister’s assurance that 5AMLD would be implemented by expanding the HMRC Trust Registration Service even if the UK leaves the EU without a Withdrawal Agreement. (Paragraph 88)

19.We also welcome the Government’s assurance that the TRS will cover discretionary trusts, and that overseas trusts with assets which include UK land will be required to register. We suggest, however, that the Government consider what information the TRS should require from these trusts in order to establish their true beneficiaries. (Paragraph 89)

20.Because of its importance in preventing the use of trusts in money laundering, we recommend that the TRS be publicly accessible. (Paragraph 90)

21.Given that the Fifth Anti-Money Laundering Directive is to be implemented before this draft Bill, we regret that the Government’s proposals for the former are not yet available. It is difficult to scrutinise part of the proposed anti-money laundering regulatory framework without being able to see the full picture. (Paragraph 91)

22.The Government will need to exercise great care in ensuring that trusts do not slip into any gaps between the two frameworks. We therefore call on the Government to explain which arrangements for holding land in the UK involving trusts will be covered by the draft Bill, and which by implementation of 5AMLD. The draft Bill should set out expressly those situations where it covers arrangements for holding land in the UK that involve trusts. At the very least, we would expect such situations to be covered by statutory guidance. (Paragraph 92)

23.Trusts should not be required to register twice, which, the Government says, would create an unacceptable administrative burden. Accordingly, we invite the Government to give serious consideration to implementing the provisions in this draft Bill at the same time as 5AMLD, and to ensure that charitable institutions are covered by one of the two frameworks. (Paragraph 93)

24.We were convinced by the view of witnesses, particularly those campaigning for greater transparency in land transactions, that a 25 per cent ownership and voting threshold for the definition of beneficial ownership could undermine the draft Bill’s aim to capture the true beneficial owners of overseas entities. We therefore urge the Government seriously to consider the case for lowering the 25 per cent ownership and voting rights thresholds. In its response to this report, it should outline in detail the rationale for its ultimate decision on thresholds. (Paragraph 103)

25.We welcome the flexibility given to the Secretary of State by Schedule 2, paragraph 25 of the draft Bill to account for the emergence of new and more complex ownership and control structures. Given the Government’s stated concerns about the effect that such powers could have on the efficacy of the Bill, we agree that the affirmative resolution procedure is appropriate. (Paragraph 104)

26.While we are restricted in our consideration to the provisions of the draft Bill, we feel strongly that the problems identified with the proposed thresholds for the Register of Overseas Entities apply equally to the People with Significant Control register. Consideration regarding thresholds should therefore also be extended to the PSC register. To avoid unnecessary administrative burdens on interested parties, and to promote the coherence and efficacy of the two registers, whatever ownership or voting threshold is determined for the Register of Overseas Entities should be mirrored by the People with Significant Control register. (Paragraph 106)

27.The definition of beneficial ownership encompassed by ‘Condition 4’ in the draft Bill (a person having “significant influence or control” over a legal entity) will be crucial in ensuring that beneficiaries who may not otherwise meet the proposed ownership or voting thresholds of beneficial ownership fall within the scope of the draft Bill. (Paragraph 111)

28.However, we were concerned by evidence outlining how an inexact definition of “significant influence or control” might hinder the utility of this Condition in the draft Bill. We therefore welcome the Minister’s intention to produce such guidance. (Paragraph 112)

29.To underline how integral this Condition will be to the Bill’s stated purpose of encompassing the true range of beneficial ownership of overseas entities, the Government should include within the Bill a requirement for the Secretary of State to produce guidance on interpreting the meaning of “significant influence or control” for the purposes of this legislation. (Paragraph 113)

30.To avoid any duplication or contradiction, the Government should ensure that this guidance tallies as far as possible with equivalent guidance on the meaning of “significant influence or control” under the People with Significant Control regime. (Paragraph 114)

31.Provided that the Government gives further assurance that the power provided by Clause 16 of the draft Bill to exempt a beneficial owner from the requirement to register would be used only sparingly, and that it would be used only in the interests of—for instance—national security, we would be content with the inclusion of this power in the draft Bill. The Government’s response to each of these points will merit close attention when the Bill is introduced to Parliament. (Paragraph 120)

32.However, the draft Bill proposes only that “special reasons” will justify exemptions. This is a very broad term. Given the envisaged lack of parliamentary scrutiny of this power to exempt, our preference would be that the possible reasons for exemptions under this section should be set out on the face of the Bill. (Paragraph 121)

33.We note the suggestion by OpenCorporates that it should be possible to challenge the suppression of information from public disclosure. It is our assessment that the draft legislation would not prevent interested parties from appealing through the Courts the suppression of information—or the suppression rules themselves—if the Government’s decisions were seen to be unlawful. (Paragraph 126)

34.We believe that consideration should be given to some form of procedure for challenging a decision on the suppression of information. The Government should include a detailed analysis of this proposal when it responds to this report. (Paragraph 127)

35.We are persuaded that, if individuals are at risk of harm should their beneficial ownership information be made public, it would be appropriate for the Secretary of State to restrict publication of that information. We therefore agree with the powers provided for in Clause 22 of the draft Bill. (Paragraph 129)

36.Though the effect of Clause 22 will be to restrict information being made public, it is in the Government’s interests to promote as great a degree of transparency as possible. We therefore recommend, as we proposed for Clause 16, that the Government should outline on the face of the Bill the circumstances under which the powers in Clause 22 may be exercised, or at least publish draft regulations to that effect at the same time as introducing the Bill. To mirror the PSC regulations, such regulations could, for example, protect those living with an applicant, and should allow applications for exemption where there was any serious risk of violence or intimidation. (Paragraph 130)

37.In addition, we call on the Government to publish in an annual Written Statement the number of occasions on which it uses Clauses 16 and 22 of the draft Bill. (Paragraph 131)

38.We recognise that commercial sensitivities, the volume of work required, and the timescales involved may have prevented the Government from providing a model version of the Register so that we could ascertain how well it might work for users. (Paragraph 135)

39.However, we urge the Government to publish such a model as soon as possible, so that potential users—and particular those working in the conveyancing profession—can be fully prepared for the implementation of this Bill. (Paragraph 136)

40.We believe that the efficacy of the Register proposed by this Bill will be damaged should the proposed Register not be kept up-to-date, and that the Bill should make specific reference to this necessity. (Paragraph 144)

41.We acknowledge that an “event-driven” update requirement might adversely affect third parties. We therefore suggest that, in addition to the annual update requirement, the Bill should include a specific requirement on the overseas entity to update the Register before any disposition is made. This will capture information at the point of transaction, where any potential money laundering might occur. In addition, a third party should be able to request enough information to ascertain whether the overseas entity had complied with its duty. (Paragraph 145)

42.Legitimate transactions will be likely to amass a quantity of information about all parties involved in the transaction. This requirement should not, therefore, prove onerous. It would also provide predictability for third parties: the prospective passing of title would be an “event”, thereby triggering the update requirement. (Paragraph 146)

43.Land law is within the devolved competence of the Scottish Government. We welcome the discussions which have taken place between the Scottish Government and the Department for Business, Enterprise and Industrial Strategy on the possibility of double-reporting between the Register of Persons Holding a Controlled Interest in Land and the Register of Overseas Entities. (Paragraph 149)

44.We urge the two governments to continue to engage on this matter, and to consult and communicate with interested parties about any future reporting requirements. (Paragraph 150)

45.It is regrettable that, as currently conceived, the proposed Register of Overseas Entities will have insufficient verification checks to deter criminals who wish to submit false information. It therefore seriously risks failing in its central policy aim: to provide a reliable and transparent record of the beneficial ownership information of overseas entities investing in the UK property market. (Paragraph 160)

46.With the introduction of this draft Bill and the Fifth Anti-Money Laundering Directive, the Government has a clear opportunity to strengthen the efficacy and transparency of its efforts against financial crime. It should grasp this opportunity, by establishing workable verification mechanisms for each of the registers that it has established. (Paragraph 161)

47.The Government should ensure that the Register includes a mechanism allowing users of the Register to “flag” suspicious or potentially incorrect information and that mechanisms are in place to examine this information. It could replicate the successful ‘Report it Now’ function of the Companies House register in its design of the Register of Overseas Entities. (Paragraph 162)

48.We urge the Government to move forward as quickly as possible with reforming the role of Companies House to ensure that it can conduct checks on the veracity of the information that it holds. We recommend that Companies House be provided with sufficient resources to undertake these additional tasks. (Paragraph 169)

49.Section 1063 of the Companies Act 2006 entitles Companies House to charge fees. We understand that the Government may be recompensed for the cost of running of the Register, at least in part, by the overseas entities that use it. The Government should ensure that Companies House is fully equipped and properly resourced for the likely surge in demand from overseas entities that refrain from registering until the end of the 18-month transition period. (Paragraph 173)

50.We are concerned that the Government has wholly underestimated the likely true cost to entities of obtaining external advice from regulated professionals. Costs would almost certainly rise if additional responsibilities were placed on professionals. (Paragraph 174)

51.Licensed professionals are already bound by the Money Laundering Regulations to perform checks on their clients. It may be possible to make use of these requirements in relation to this Register. It may also be possible to exempt entities registered in certain jurisdictions from the requirement to obtain verification from a regulated professional if the jurisdictions have already conducted verification checks. (Paragraph 175)

52.We therefore recommend that the Government should explore the viability of requiring regulated professionals to verify beneficial ownership information submitted to the Register. (Paragraph 176)

53.We are satisfied that the absence from the Scottish Register of any express limitation where an overseas entity is the owner will not cause conveyancing professionals any difficulty. (Paragraph 187)

54.However, while it is unlikely that many third parties would attempt their own conveyancing without professional help, we see no good reason why those who do should be exposed to a new risk. To cover the potential risk to third parties, the Government may wish to consult further with the Scottish Government about whether Land Register title sheets should signal expressly and in writing that the Keeper regards the applicant as an overseas entity, and that deeds will only be registrable if the entity is compliant. (Paragraph 188)

55.Any such pre-clearance mechanism should be open to all parties to a proposed property transaction involving an overseas entity. (Paragraph 189)

56.The variation between the length of leases caught by the Bill in the UK’s three legal jurisdictions means that prospective tenants in England and Wales are more likely than those elsewhere to be without legal advice about a lease affected by the draft Bill. The Government should mitigate this possibility by publicising the requirements of the Register as widely as possible. (Paragraph 193)

57.According to the provisions of the draft Bill, only those entities which, under existing rules, were obliged to supply the land registries with information identifying them as overseas entities would need to register at Companies House. But there is no obvious reason why the Secretary of State’s power under Clause 30 to order registration should be limited to these overseas entities. The registrars, or the Secretary of State, may be able to call on enough information to identify overseas entities which registered property even before collection of an owner’s country of incorporation became mandatory in the various legal jurisdictions. (Paragraph 198)

58.We therefore recommend that the Secretary of State be given power to require any overseas entity to register at Companies House if registered as proprietor or owner of a qualifying estate (or its equivalent in Scotland). This might be achieved by amending Clause 30 to remove the incorporation of the retrospective time limits in Clause 9(9)(a)(ii), (b)(ii) and (c)(ii). (Paragraph 199)

59.To ensure that this approach will be fully enforced, we recommend that Schedules 3 to 5 be amended so that the recipient of such a notice is restricted from disposing of land. To avoid the difficulty that this might otherwise cause for third parties in Scotland (where no restriction or inhibition would be registered), the Secretary of State, or the Keeper of the Registers of Scotland, should be required to publish and maintain a list of those to whom such notice had been given. (Paragraph 200)

60.The Government is aware of many of the adverse consequences that the draft Bill could bring to third parties. Any enforceable mechanism prohibiting the disposal of property will create risks for innocent third parties. We therefore welcome the consideration that is being given to a possible power to disapply the effects of restrictions on registration (Paragraph 205)

61.An inaccurate update under Clause 7 would, and should, attract criminal penalties. However, it seems inconceivable that the Government intends that an inaccurate update under Clause 7 should affect the registration by third parties of dispositions to them: such inaccuracy might be impossible for third parties to discover. But, as drafted, Schedules 3 to 5 could indeed have such consequences. (Paragraph 210)

62.We therefore recommend that the Government should clarify, on the face of the Bill, the extent to which the land registries and applicants for registration should be concerned with the accuracy of updates under Clause 7. To avoid a “chilling effect” on the property market, the accuracy of such updates should not be a matter of concern for innocent third parties entering into property transactions with overseas entities. (Paragraph 211)

63.Provided that the provisions of the draft Bill work as intended, and that the Government takes our recommendations into account, we are satisfied that the overall effect of the draft legislation on the UK property market will be beneficial for those involved in land transactions. (Paragraph 212)

64.The Government should continue to consult with the public as it implements the legislation, and communicate clearly to individuals and entities about how they might be affected. (Paragraph 213)

65.We recognise that there will inevitably be hurdles to enforcement, and that the aim of this legislation is to create a hostile environment in the UK for money laundering. But Parliament should not enact unenforceable legislation, and legislation without “teeth”’ will be no deterrent (Paragraph 221)

66.We are attracted to the idea of civil penalties, particularly if they are easier than criminal sanctions to enforce abroad, and against land or other assets in the UK. Civil penalties could be backed up by criminal sanction for non-payment. (Paragraph 222)

67.We therefore recommend that the Government should introduce civil penalties and explore with the devolved administrations the possibility of enforcement against land of any criminal fines imposed under the Bill. (Paragraph 223)

68.This Register will be the first of its kind in the world, but it will work together with existing anti-corruption measures. If the Government delays the introduction of the draft Bill to Parliament until the next Parliamentary session, it may create an unnecessary incongruence between this legislation and the Fifth EU Anti-Money Laundering Directive. We therefore recommend that the Bill and 5AMLD be presented to Parliament as soon as possible. (Paragraph 226)

69.Parliament will need to keep a close eye on the operation of the Register, and on the extent to which it is achieving its aims. While we recognise that measuring the success of this legislation will be difficult, we expect the Government to publish, in an annual Written Statement, their assessment of the extent to which this legislation has achieved its aims. (Paragraph 227)

70. In the near future, scrutiny of the Register may be conducted by Select Committees of both Houses. Five years after the Act has been brought fully into force, further scrutiny of the legislation itself will provide instructive lessons for other anti-corruption efforts. Consideration should be given to the establishment of a Select Committee to carry out post-legislative scrutiny of the Registration of Overseas Entities Act. (Paragraph 228)

71.Clause 7 is not drafted sufficiently clearly. We recommend that the clause be re-drafted to be easier to follow. (Appendix 6)

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